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Environmental Social and Governance (ESG)

Environmental Social and Governance (ESG)

Environmental, Social and Governance (ESG)

Institutional investors increasingly take environmental, social and governance (ESG) issues into account when making investments in portfolio firms. This can be in the form of direct shareholder engagement or through screening, whereby firms with certain ESG characteristics end up on positive or negative (exclusion) investment lists. ESG investment can also imply the divestment of portfolio firms. As pointed out by Larry Fink, Blackrock Chairman and CEO, in his 2017 letter to the CEOs of portfolio companies, the underlying investment idea is that “Environmental, Social and Governance (ESG) factors […] can provide essential insights into management effectiveness and thus a company's long-term prospects.”

While many institutional investors started to incorporate G topics, such as board structure or executive compensation, several decades ago, the integration of E&S issues into the investment process is a more recent phenomenon. E topics include climate change, waste, pollution and water rights, while S issues may be related to human rights issues, weapons, tobacco, and labour standards.

ESG investing is set to have a major impact on many portfolio firms. By 2018, more than 2,000 signatories representing over US$80 trillion of assets had signed the UN Principles for Responsible Investment (PRI), a document that commits its signers to consider ESG factors when making investment decisions.

An important driver behind the increasing importance of ESG investment is academic research indicating that incorporating ESG factors into the investment process can lead to higher investment returns and lower risks. Individuals affiliated with ECGI have made several important contributions to this research, some of which is listed on this theme page.

ECGI will continue to track the progress of research in this area and related developments. Additional resources will be made available through these pages.

We propose a novel way of measuring the portfolio-level environmental and social characteristics of 13F institutional investors (the “sustainability footprint”). We show that the environmental (social) footprint of institutional investors has...Read more

Examining a shock to the salience of the sustainability of the US mutual fund market, we present causal evidence that investors marketwide value sustainability. Being categorized as low sustainability resulted in net outflows of more than $12...Read more

Most investors have a single goal: to earn the highest financial return. These socially-neutral investors maximize their risk-adjusted returns and would not accept a lower financial return from an investment that also produced social benefits. An...Read more

Corporations play a crucial role in achieving a sustainable world. In achieving corporate sustainability, the current regulatory frameworks generally emphasize the role of the corporate board, but today’s media suggest that institutional...Read more

Are MNEs more socially responsible, and where is this more likely to occur? Are rms less responsible in emerging or transitional economies, and what impact does the dominant national corporate governance regime have? We explore the association...Read more

Few doubt that hedge fund activism has radically changed corporate governance in the United States -- for better or for worse. Proponents see activists as desirable agents of change who intentionally invest in underperformingcompanies to...Read more

We study investor activism promoting environmental, social and governance (ESG) improvements using a proprietary dataset. Targets have a higher market share, analyst coverage, stock returns, and liquidity. The engagements lead to ESG rating...Read more

A firm's corporate social responsibility (CSR) practice and its country's legal origin are strongly correlated. This relation is valid for various CSR ratings coming from several large datasets that comprise more than 23,000 large companies from...Read more

The chapter investigates the impact of employee participation on the board of directors or supervisory board (particularly codetermination) on corporate social responsibility (CSR). Conceptually, it is important to distinguish between ?internal?...Read more

We study the extent to which a firm's social capital, as measured by the intensity of a firm's corporate social responsibility (CSR) activities, affects firm performance during the 2008-2009 financial crisis. We find that high-CSR firms have...Read more

This paper presents an industry equilibrium model where firms have a choice to engage in corporate social responsibility (CSR) activities. We model CSR as an investment to increase product differentiation that allows firms to benefit from higher...Read more

When stakeholder protection is left to the voluntary initiative of managers, relations with social activists may become an effective entrenchment strategy for inefficient CEOs. We thus argue that managerial turnover and firm value are increased...Read more

In a 2010 report, The Economist called the resurgence of state-owned mega-en- terprises, especially those in emerging economies, “Leviathan Inc.”, and criticized their poor governance and e ciency. We show that stateowned enterprises engage more...Read more